Related Companies

Lead Channel

Channels

Keywords

Bank of Canada asks: Is a cashless society problematic?

23 October 2018

10

5

1

If the long-predicted cashless society ever materialises it will be unlikely to cause material system-wide problems, according to a Bank of Canada paper, which nevertheless warns that options such as central bank digital currencies might be needed to tackle operational reliability and contestability issues.

The use of bank notes in Canada, as in many countries, has been in decline for some time, and as electronic alternatives gain in popularity the idea that consumers and businesses could effectively abandon cash is gaining traction.

While noting that cash demand as a share of GDP has been stable for decades, the Bank of Canada is sanguine about any future cashless society, noting that there is already near-universal access to electronic services and banking in the country and concluding that a "cashless society would not generally cause material system-wide problems".

However, the paper does warn that an increased dependence on retail payment networks might raise concerns about their maintenance and operational reliability. For example, in June more than five million transactions across Europe failed during an unprecedented 10 hour outage at Visa.

To guard against this, the BoC offers three possible policy responses: regulate the critical payment networks to support reliability and mitigate anti-competitive outcomes; retain the obligation to make cash available; and issue a central bank digital currency to compete with the private payment networks.

This last option is something that the BoC has been investigating, publishing research last December that suggested that a central bank digital currency has the potential to become a cheaper and easier to use alternative to cash and cards.

Another issue that a cashless society raises is the need to provide a safe store of value in an extreme financial crisis. Again, the paper suggests three options: simply reintroducing cash in a crisis; relying on government securities as a safe store of value; or using a central bank digital currency.

In Europe we now have the payment account directive since 2017 guaranteeing every EU citizen a reasonably priced payment account including a debit card and bill payments service, merchants are getting a better deal for card acceptance pricing through the
interchange fee regulation and the payment services directive is adding consumer protection and increased competition in electronic payment services. In Sweden some 85% of all retail over the counter is paid for by general purpose cards and instant payment
credit transfer can be used also in an increasing number of e comm and merchnat stores. With these implemented, what are the economic reasons for central bank electronic cash? Remains to be resolven - redundance for payments to avoid service outages due to
central systems failing: This is actually designed into the emv chip alloowing the issuer to set off-line parameters ands thus the card can itself approve the large number of pos payments where cash may be used as an alternative. Note that central bank issued
e-cash would have similar risk for service glitches due to central systems unavailability as e.g. visa and mc cards may have with one difference: There is only one central bank but multiple card schemes with separate central systems... So from consumer payment
capability card schemes and instant payment schemes should be able to give at least the same service level as central bank issued e cash payments could give. Remains the political issue: should payments be a service operated by society and not by the private
market in competition?